How do you keep your car in bankruptcy?

Dear Bankruptcy Adviser,
I filed Chapter 7 bankruptcy but did not include my current auto lease in it. My bankruptcy was discharged in February and I have continued to make my car payments, yet on my credit report the lender has listed the loan as part of my Chapter 7. When I called the lender, they said that's how it's done. Is that true, why am I paying them on time if it will not matter on my credit report?
-- Karen

Dear Karen,
You are dealing with a very knotty post-bankruptcy issue. The majority of car lenders require that in order to keep a car, the buyer must sign a reaffirmation agreement.

Most people do not understand this, but everything you own is included in the bankruptcy, even those things you want to keep out. This car loan must be included in the bankruptcy, but your intention is to keep the vehicle and continue to make payments. That's fine, but it doesn't exclude it from the bankruptcy. This is where the reaffirmation agreement comes in.

A reaffirmation agreement is a legally enforceable contract filed with the bankruptcy court that states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case. Some lenders demand that you sign this agreement and will not send you statements or report payments to the credit bureau without the court-approved agreement. In many instances, lenders consider it a breach of the terms of your loan and will repossess the car if you fail to sign the agreement.

There are some lenders who will allow you to keep the car and continue to make regular monthly payments. Unfortunately, this also means that future payments might not be reported on your credit report. You will be able to pay off the car and eventually receive the vehicle title, but you might not see any benefit to your credit for all those payments.

I believe this is a Catch-22. On the one hand, you want to keep your car and receive the benefit of post-bankruptcy credit reporting of future payments. On the other hand, if you lose your job or are unable to make the payments after you sign the reaffirmation agreement, the car will be repossessed and you will be required to pay the remaining balance once the car is sold.

You have just filed bankruptcy, which wipes out your liability for most or all of your debt. Most people filing bankruptcy do so because of financial distress. About 75 percent of people filing for bankruptcy protection do so because of the loss of a job, reduction of hours at work, divorce or medical debt. Once your debt has been wiped out, I believe you don't want to be burdened by any debt that you may have owed prior to filing.

Unfortunately, many people have an emotional attachment to their car. It is their pride and joy or their only means of transportation to and from work. The latter is a compelling reason to keep a vehicle, but at what cost?

If you owe much more on the car than it is worth, you might not want to be legally liable for that debt after your bankruptcy is over. In that case, you might not want to reaffirm the debt (unless the lender says it is mandatory) and allow yourself to pay if you can. Instead, you might want to surrender the vehicle if the payment and the car's value don't jibe.

If you have only two years left of car payments, that might be a more appropriate situation where reaffirming the vehicle benefits you. The car will be paid off soon. It is hoped you have a stable job and you can be more certain that you can complete the payments.

However, when you have a high balance on a car that is worth much less than what you owe, or your job is unstable and the car payment is very high, reaffirmation of the car loan likely could result in a repossession and liability on a car that cannot be eliminated in a Chapter 7 bankruptcy.

I wish there were viable alternatives. Unfortunately, not many exist. It is a tough decision and one that must be taken cautiously. You are getting your fresh start after bankruptcy and should try to be as clear of debt as possible. I think you have made the wiser decision even though your credit will not be helped. You will have plenty of opportunities after bankruptcy to re-establish credit.

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